Clarivate Analytics plc — Q1 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2020, compared with March 31, 2019. Clarivate provides subscription and transactional content, analytics, professional services and workflow solutions through its Science and Intellectual Property product groups. The period includes one month of operations from the February 28, 2020 acquisition of Decision Resources Group (DRG). The filing also reflects the January 2020 divestiture of certain MarkMonitor assets and the emerging COVID-19 pandemic.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue, net | $240.6 million | $234.0 million | +2.8% |
| Adjusted revenue | $242.5 million | $234.2 million | +3.5% |
| Subscription revenue | $193.2 million | $192.5 million | +0.4% |
| Transactional revenue | $49.2 million | $41.7 million | +18.1% |
| Operating loss | $(28.3) million | $(25.9) million | Worsened by $2.4 million |
| Net loss | $(74.0) million | $(59.3) million | Worsened by $14.7 million |
| Basic and diluted loss per share | $(0.22) | $(0.27) | Improved by $0.05 |
| Adjusted EBITDA | $78.2 million | $59.2 million | +32.1% |
| Adjusted EBITDA margin | 32.2% | 25.3% | +6.9 percentage points |
| Cash flow from operations | $46.1 million | $42.5 million | +$3.7 million |
| Free cash flow | $26.7 million | $36.5 million | $(9.8) million |
GAAP operating margin was approximately negative 11.8% and net margin was approximately negative 30.8%, compared with approximately negative 11.1% and negative 25.3%, respectively, in Q1 2019.
- Cash and cash equivalents were $308.0 million at March 31, 2020, versus $76.1 million at December 31, 2019. Including restricted cash, total cash was $310.9 million.
- Total debt outstanding was $1.957 billion, consisting primarily of $1.257 billion under the term loan facility and $700.0 million of senior secured notes due 2026. Net carrying value of long-term debt was $1.915 billion.
- The company had no revolving credit facility borrowings at March 31, 2020 and reported a consolidated coverage ratio of 4.65-to-1.00 and leverage ratio of 3.87-to-1.00. Management stated that it was in compliance with debt covenants.
- Deferred revenue was $490.9 million, including $472.1 million current and $18.8 million non-current, supporting future revenue recognition.
- Annualized contract value was $820.3 million, up 7.2% from $765.1 million, while annual revenue renewal rates remained 93.0%.
Material changes versus the prior comparable period
- Science Product Group revenue increased 14.0% to $147.3 million, primarily reflecting DRG-related growth and organic subscription growth.
- IP Product Group revenue decreased 9.3% to $95.2 million, principally due to the MarkMonitor divestiture, partly offset by Darts-ip and organic growth.
- Adjusted EBITDA increased despite the GAAP net loss worsening. The improvement reflected lower cost of revenues and selling, general and administrative expenses, lower amortization and favorable other operating income.
- Share-based compensation increased to $17.5 million from $3.2 million, substantially due to the waiver of performance conditions on merger shares, which generated $13.7 million of expense.
- Transaction expenses increased to $26.7 million from $10.3 million, largely due to the DRG acquisition and February equity offering. Restructuring expense was $7.8 million versus none in the prior period.
- February 2020 financing included a $540.6 million equity offering and $360.0 million of incremental term loans. The company used these proceeds, cash on hand and other financing proceeds to fund the DRG acquisition.
- Investing cash outflows increased to $901.0 million, including $885.3 million for the DRG acquisition and $19.4 million of capital expenditures.
- Free cash flow declined because capital expenditures increased to $19.4 million from $6.0 million.
Guidance, outlook, commentary and risks
Management did not provide a clear quantitative full-year revenue or earnings guidance figure in the filing. Management stated that cash from operations, available cash and borrowing capacity were expected to be adequate for debt service, liquidity needs and necessary capital expenditures for at least the next 12 months, based on scenario planning that included reasonable and downside COVID-19 cases.
- COVID-19 created substantial uncertainty. Management reported limited operational disruption from remote work but warned that weaker customer liquidity, delayed payments, lower new subscription activity and reduced transactional demand could adversely affect results and cash flows if the pandemic became prolonged.
- The DRG purchase price was approximately $965.0 million, including $900.0 million of base cash, $6.1 million of adjusted closing cash and contingent stock consideration. The purchase accounting allocation remained preliminary and included approximately $499.1 million of goodwill.
- Contingent stock consideration related to DRG was revalued to $60.1 million at March 31, 2020. Additional contingent liabilities included $3.5 million for Publons and up to $3.5 million for Kopernio.
- Interest-rate exposure remains material because $1.257 billion of term debt was floating-rate debt; approximately $339.7 million was hedged as of March 31, 2020. The filing estimates that a 100-basis-point rate change would affect quarterly cash interest expense by approximately $2.2 million.
- Other significant risks include substantial indebtedness, acquisition integration and synergy realization, cybersecurity, data and privacy regulation, intellectual property claims, international and tax risks, foreign exchange volatility, competition and potential goodwill or intangible-asset impairment.
- The company adopted the expected credit loss standard effective January 1, 2020, reducing opening accumulated deficit by $9.3 million. Management stated that COVID-19-related credit-loss risk was not material through March 31, 2020.
- Management concluded that disclosure controls were effective at a reasonable assurance level and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether COVID-19 affected renewal rates, customer collections, transactional demand and subsequent-quarter revenue beyond the March 31 reporting date.
- The realized contribution, integration costs, synergies and debt-service impact of DRG, including final purchase accounting adjustments.
- Whether the company can sustain the reported 32.2% Adjusted EBITDA margin while absorbing restructuring, transaction, share-based compensation and integration costs.
- Liquidity headroom, revolving-credit availability, covenant compliance and the effect of floating-rate debt and interest-rate hedges.
- Future free cash flow after higher capital expenditures, acquisition spending and scheduled debt amortization.
- Potential dilution from DRG contingent shares, merger shares, options, RSUs and other equity awards.
- Exposure to impairment charges on the expanded goodwill and intangible-asset balances.
- The filing’s non-GAAP measures, including Adjusted EBITDA and Standalone Adjusted EBITDA, because they exclude substantial recurring, acquisition-related and restructuring items and should not be treated as GAAP liquidity measures.